Intuitive Surgical (ISRG) is scheduled to report its second quarter results on Thursday, July 19, 2012. The current Zacks Consensus Estimate for the second quarter is $3.52, representing an estimated 21.02% annualized growth.

First Quarter Recap

Intuitive reported first-quarter 2012 earnings per share of $3.50, surpassing the Zacks Consensus Estimate of $3.15 and beating the year-ago quarter’s earnings of $2.59 per share.

Revenues increased 28% year over year to $495.2 million, beating the Zacks Consensus Estimate of $466 million. Recurring revenues moved up 31% year over year and constituted 58% of sales.

On a segment basis, revenues from systems were $207 million, up 24% year over year. The growth was on account of sales of 140 systems, higher than 120 systems in the year-ago quarter.

Instrument and accessory revenues were $208 million, up 32% year over year. The increase in revenues reflects 29% growth in total procedures.

Service revenues were $81 million, up 27% year over year. The growth was driven by a larger installed base of systems.

Estimate Revision Trend

Agreement

The overall trend in estimate revisions for the second quarter has been somewhat tilted on the negative side with two analysts out of 13 lowering their estimates in each of the last 7 and 30 day periods with no case of upward revision.

With regard to estimates for 2012, there was one case each of upward and downward revision (out of 14 analysts) over the past week. A similar mixed pattern was observed over the past month.

The current Zacks Consensus Estimate for 2012 is $14.71, reflecting an estimated 19.4% year-over-year growth.

Magnitude

Given the relative shortage of estimate revisions, the magnitude of revisions for the forthcoming quarter dropped by a penny over the last 7 days. There was a similar decline of 1 cent in forecast, for the next quarter, over the past 30 days.

The magnitude of revisions for the forthcoming year has hit a plateau, over the past 7 and 30 days.

Intuitive Surgical has generated positive surprises in each of the previous four quarters, and we expect the same trend to continue. The company produced an average positive earnings surprise of 10.3% over the preceding four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

We expect a number of procedures that are currently completed either in an open surgical manner or with laparoscopy to be eventually replaced by da Vinci surgery, as robotic surgery becomes the standard of care in many instances. The company enjoys a virtual monopoly in robotic surgery with little competition.

Intuitive’s recurring revenue stream continues to grow and provides a shield against cyclicality of revenues arising from the sale of discretionary capital equipment to hospitals. However, we believe that until the global economy recovers fully, the stock may come under pressure as investors ponder whether lingering macro economic uncertainty weakens hospitals’ commitment to buy high-cost robotic systems.

The pace of adoption of robotic surgery may therefore be lumpy and growth in usage requires acceptance from patients and training to medical practitioners. Intuitive competes with Accuray Incorporated (ARAY) in certain niches.

We prefer to remain on the sidelines partly due to a high valuation, which factors in the attractive growth prospects of the company, despite the da Vinci system’s leading status as an enabler of robotic minimally invasive surgery. We are currently Neutral on the stock, supported by a short-term Zacks #3 Rank (Hold).